BowFlex Inc (BFX) 2011 Q1 法說會逐字稿

Welcome to the Nautilus, Incorporated First Quarter 2011 Operating Results Conference Call. At this time, all participants are in a listen-only mode. Following today's presentation, we will have a question-and-answer session. As a reminder, this conference is being recorded today, Thursday, April 28, 2011.

Before the call begins, listeners should be advised of the Safe Harbor statement that applies to today's call. Prepared remarks during this call contain forward-looking statements. Additional forward-looking statements may be made in response to questions. These statements do not guarantee future performance. Nautilus undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they are made, or to reflect an occurrence of unanticipated events. Therefore, undue reliance should not be placed upon them. Listeners should review the earnings release to which this conference call relates, and the Company's most recent periodic reports on Form 10-K and Form 10-Q filed with the Securities and Exchange Commission for more detailed discussions of the factors that can cause actual results to differ materially from those projected in forward-looking statements.

On the call today from the Company are Mr. Ed Bramson, Chief Executive Officer, and Mr. Kenneth Fish, Chief Financial Officer. I would like to turn the call over to Mr. Bramson, Chief Executive Officer. Please go ahead, sir.

Thank you, and welcome everybody to the Nautilus earnings call. I just have a few brief comments before I hand it over to Ken for a detailed review of the quarter. First, as you'll see from the release, numbers are getting a bit better. We had positive earnings for the quarter versus the same period last year. Sales in direct business improved by about 6% year-over-year. In retail, as you will recall, sales trends began to improve early last year, whereas, in direct recovery was delayed. Finally, in Q4 last year, sales in direct got to be essentially flat year-over-year, which represented an improvement over multiple previous quarters of declines.

As those of you who follow Nautilus know, we have been working hard to reposition Nautilus from a strength oriented fitness company to a greater emphasis on cardio products.

On the fourth quarter call we talked about our objective of reaching an inflection point in 2011, whereby the growth and direct sales of cardio, which indirectly is our TreadClimber product line, would exceed the decline in home gyms, allowing the Company to report positive sales growth on a net basis from a direct channel.

In the first quarter we finally reached that inflection point. We have attached the others to this slide that shows the trends in sales of cardio and strength within the direct channel. Without going into too much detail, what the slide shows is that in Q4 of last year, TreadClimber grew by 14%, or $2.5 million year-over-year, which was good growth. But home gyms declined in the same period by 23%, or $3.2 million, so the sales performance of TreadClimber, which has been improving steadily, was masked by the decline in home gyms.

In Q1 of this year, we have reached the point where TreadClimber is now the dominant factor in the direct sales channel, about 70% in the total. So, TreadClimber has grown from 24%, another strong performance, was more than enough at $4 million to offset a 19% decline in home gyms, and only reduced sales by $2.3 million on its reduced sales base.

Our current expectation for direct is that the rate of decline with home gyms will continue to moderate and TreadClimbers will continue to show year-over-year growth. What is helping TreadClimber is improved availability of credit, which we have discussed before, and also great improvements in media efficiency such that we are now acquiring sales leads of about half the cost at this time last year. We obviously don't want to declare victory prematurely, but we are very pleased with the way the trends are now going.

Before I turn it over to Ken, I'd just like to say a few additional words. As you will have read, Ken is retiring as CFO to assume other duties within Nautilus. Mike Mulholland, who has recently joined our Company, will formally become CFO early next month. Mike has a great record of experience in financial management of several public companies and we have every confidence that he will be a great addition to the management team.

Ken has been CFO during a pretty long period of turnaround, which was as difficult to manage through as anything I've ever encountered. Ken has been very professional and level-headed, and his approach has been invaluable in getting the turnaround accomplished. I'd like to thank him myself for all the hard work that he has done, but everyone else in the Company is grateful to him, too. And with that I'd like to turn it over to Ken to take us through the details of the quarter.

Thanks, Ed. My comments today will primarily focus on the results for the continuing operation that is consistent with the direct and retail fitness businesses and excludes our discontinued operations. I'll begin by discussing results of our overall company, and then I'll move on to provide additional detail on the two segments.

Our net sales were $48.3 million in the first quarter of 2011, a 5.8% increase compared to $45.6 million in the first quarter 2010. As you may recall, we achieved flat sales in the fourth quarter of 2010, which ended a trend of negative quarterly sales comparison for the past 11 quarters. The first quarter of 2011 represents the first quarter where net sales increased compared to prior year since the fourth quarter 2007.

Consolidated gross profit margin in the first quarter of 2011 was 45.7% of net sales compared to 50.3% in the first quarter of 2010. Lower gross profit margin this year resulted from lower margins for both segments due to changes in product mix and higher freight costs. I will provide additional color on the gross margins during my discussion of segment results.

Looking at operating expense components, selling and marketing expenses were $14.9 million in Q1 2011, a decrease of $4.1 million compared to Q1 2010. The decline in selling and marketing reflects our strategy decision to reduce television media advertising for home gyms. In addition, it is important to note that our Q1 2010 advertising included Mobia specific advertising but was not repeated in the first quarter of 2011.

Our ability to increase sales while decreasing selling and marketing expense highlights our success in improving the productivity of our advertising dollars. Continuing what we began in the fourth quarter of 2010, we are reallocating a greater portion of the television advertising budget toward the Bowflex, TreadClimber product line, and we expect to continue to direct the maturity of the marketing expenditures to these product lines during the remainder of 2011.

Cardio products represent approximately 70% of equipment sales in our industry, and we are continuing to increase our focus in this area. With strength home gyms, we are able to capitalize on extensive product awareness for Bowflex rod-based gyms and rely on lower cost Internet-based advertising.

Total G&A was $4.7 million in Q1 2011 compared to $5.2 million in Q1 2010. This 9% reduction is driven by the realization of the cost-saving initiatives that we started a couple of years prior. The savings are primarily attributed to lower personnel, occupancy, depreciation and outside service-related costs.

Total operating expenses in Q1 2011 declined by 18.5% to $20.3 million compared to $24.9 million in Q1 2010, reflecting our ability to leverage fixed costs across higher sales volumes in addition to the more cost-effective advertising discussed earlier.

Operating income was $1.8 million in the first quarter of 2011 compared to an operating loss of $1.9 million in the first quarter of 2010. This significant improvement reflects the leverage potential in our direct business and continued profitability of the retail business.

While our tax rate for continuing operations in Q1 2011 was approximately 34%, this should not be interpreted as a new trend. We recognize income tax expense in Q1 despite considerable US net operating loss carry forwards because of taxable income generated in Canada, and US tax treatment of trade name and tangible asset amortization.

As of March 31, 2011, we have approximately $82 million of net operating loss carry-forward available to offset future US taxable income. For the foreseeable future, our income tax expense will be around the dollar amount recorded for Q1 2011 regardless of the profitability of our US-based business.

Net income for the first quarter 2011 was $1.6 million, or $0.05 per share. Included in net income is income from continuing operations, net tax of $1.1 million, or $0.04 per share, and income from discontinued operations of $0.5 million, or $0.01 per share. Net loss for the first quarter 2010 was $7.8 million, or a loss of $0.25 per share.

In that first quarter of 2010, loss from continuing operations was $2.4 million, or a loss of $0.08 per share, and loss from discontinued operations totaled $5.4 million, or a loss of $0.17 per share.

Now, I'd like to provide additional detail on the segment results. First quarter 2011 net sales of the retail business increased 6.5% to $17.0 million compared to $15.9 million last year. Retail channel sales of elliptical machines and SelectTech products were especially strong.

Sales to our Internet-based customers helped increase total retail channel revenue compared to the prior year. Cardio product category, which is primarily made up of Schwinn exercise bikes and elliptical machines, first quarter 2011 net sales increase was relatively flat compared to the first quarter 2010. While our elliptical sales were strong, this was offset by lower treadmill sales.

The strength of our category increased by 20.0% in the first quarter of 2011 compared to the first quarter of 2010 as a result of strong sales of our SelectTech products.

We have increased our inventory of products sold through the retail channel and think that inventory is now aligned with forecast demands.

Net sales of our direct business in Q1 2011 were $30.3 million compared to net sales of $28.5 million in Q1 2010. In the cardio product category, first quarter 2011 net sales were up 24.0% compared to the first quarter 2010, primarily due to increased sales of the Bowflex TreadClimber Cardio product line. Cardio sales benefited from our strong product offerings, improved consumer credit availability, and our new creative media, which resulted in a decrease in cost [relief] for the quarter.

These strong sales offset continued unexpected sales declines of our legacy strength-oriented products including Bowflex rod-based home gyms, which fell 19.3% in the first quarter of 2011 compared to 2010.

As Ed mentioned, we expect these trends with cardio and strength will continue throughout the year and improved cardio sales will more than offset declines in strength during 2010-11.

Another factor that strengthened our Q1 2011 sales was our new financing programs. As many of you are likely aware by now, we transitioned to a new tier one credit provider in September 2010, after experiencing significantly reduced credit approval rates from our previous consumer financing source compared to levels typically obtained in prior years.

We continue to be encouraged by improvements in our customers' ability to obtain credit. We are also pleased with improved credit lines that are usually high enough to allow our customers to finance our higher priced premium products. For the first quarter of 2011, credit approvals from the primary consumer financing source averaged approximately 16% of the applications processed compared to approximately 13% in the first quarter of 2010.

Additionally, credit approvals from our secondary consumer financing sources added approximately 5 percentage points for a total of 21% approval rate in the first quarter of 2011. We did not have a secondary consumer finance partner in the first quarter of last year due to our previous provider losing its funding source. As a result, we have decided to partner with two separate companies for our secondary and consumer financing program.

Gross profit margin for the retail business was 23.4% in the first quarter of 2011 compared to 26.5% in the first quarter of 2010. The decrease in margin was due to higher costs for SelectTech products and increase in freight expenses.

Gross profit margin for the direct business declined to 56.3% in the first quarter of 2011 compared to 61.5% in the first quarter of 2010. This margin decline is primarily due to changes in product mix and higher outbound freight costs.

Our retail business achieved operating income of $2.2 million in the first quarter of 2011 compared to $2.3 million in the first quarter of 2010. We continue to be pleased with the strong contribution to our business from our retail segment.

Operating income for the direct business improved substantially. Q1 2011 operating income was $2.2 million, compared to an operating loss of $1.5 million in Q1 2010. We are very pleased with the improvements in our direct operating income. This reflects our successful expense management, particularly with our advertising spend as well as our success in repositioning our direct business to focus more on cardio products, which represents a large portion of the overall fixed market.

We remain optimistic about the outlook for the direct business and are encouraged by the opportunities to benefit from our operating efficiencies.

Turning to our consolidated balance sheet, inventories were $10.9 million at March 31, 2011, compared to $10.3 million at the end of 2010. We are very comfortable with our inventory levels in all areas of the business. Trade receivables were $11.1 million at March 31, 2011, of which $10.8 million was from continuing operations. This compares to trade receivables of $19.6 million at the end of 2010, of which $19.3 million was from continuing operations.

The large decrease in accounts receivable was primarily due to lower seasonal retail sales in Q1, as compared to Q4 of last year, and continued improvement in our day sales outstanding.

As of March 31, 2011, our cash and cash equivalents improved to $16.6 million. Our cash position is adequate to support growth in our business going forward.

I would also like to point out once again that we have $82 million in federal net operating loss carry-forwards that are available to offset future taxable income.

It has been my privilege to serve as the Company's CFO for the past approximately two and a half years, as Ed said, during very difficult times for the business. I think the results for the first quarter of 2011 provide a glimpse of the future potential of our restructured business. I would like to welcome Mike Mulholland to the management team. Everyone here at Nautilus is excited about the future and energized to deliver growth and to improve the profitability for you, our shareholders. With that, Susan, we will now open up for any calls with the questions.

Thank you. (Operator Instructions) Our first question is from the line of Reed Anderson with D.A. Davidson. Please go ahead with your question.

Hi, guys. Nice to see some continued progress. A couple of questions. One is looking at margins, freight was obviously an issue, which makes sense to me. Ken, could you quantify the freight impact in gross margin, if you want to do it either overall or by segment. Just give us a sense of where that's at. And then, secondly, what does it look like going forward? Is that something that is sort of permanent this year or was there an anomaly in the first quarter?

I mean, the impact on margin is around 1%, and I think oil prices are probably going to continue to be high. But what tends to happen, Reed, is that as we get charged for the incremental costs in the freight, there is some delay in being able to pass through some of those increase in expenses through higher pricing. So, what we expect to do is to take a look at pricing later in the year and be able to offset some of the freight increases going forward.

Okay. And on the other piece of goods, or cost of goods, what about just the actual cost of production? Are those going up at rates that are manageable? I mean, what is that kind of looking like right now?

Well, I specifically mentioned some of our SelectTech products as being free weights, obviously, that are going to be impacted most directly on the increasing steel cost. So far we have had limited other increases, but there is obviously pressures that are out there. Our operations people have done a great job of working with our suppliers and some of what is happening is as we increase our volumes, they get better throughput to their factories and it does help them to do a better job to cover their fixed costs. And so it always helps to have a little bit of growth to offset some of the other cost pressures.

So, we see it coming. I think everybody sees it coming, the imports from Asia. So far we have been able to offset most of it. And then, of course, as we come out with new products we'll do our best to find the best partner to source those from at the right quality and the best cost.

Okay, good. What about in terms of on the sales side, the SelectTech? I mean, was there something that drove that? There was a big increase of product that I certainly hadn't expected, and nice to see. I'm just curious what might have been behind that and what might be sustainable in that area the next couple of quarters?

Ed may want to add on to the answer, Reed, but what I would say the SelectTech products have been very good sell-through on our retail partners for a number of quarters, so it's not necessarily new. It's more of a continuation. Some of it might be that as we focus more on explaining to the shareholders that the home gyms are softening, maybe we're just tending to focus more on it to make sure they're clear that it's not all strength that is a problem necessarily. It's, to some extent, more of the home gym and where they're at in their product line. So, it's not a brand-new thing. It's really been a good selling product line for quite a few quarters. But it is becoming more material now because your home gyms are dropping off.

And was the -- but, I mean, is it apples-to-apples in existing, say, a fitness or sporting goods store, or are you actually adding a little more distribution, for example, that product, where you might be putting in more Dick's stores or Sports Authority, that kind of thing?

I think it's pretty much apples-to-apples. The product ties in with some of the stuff you see on TV, like P90X. There is some growth that is being driven there, some of which is online as well.

Good. In terms of other sales-related stuff, credit approvals obviously continue to pick up nicely. I am presuming that it continues to be kind of a sequential process. I mean, any reason to think that that wouldn't gradually keep kicking up here next several months and into the back of this year?

I think it probably should get a little better. What's happening is that you've got two groups of credit people. You've got tier one, which is GE, and then you've got the lower credit. And what is happening is that GE is they are raising credit approvals a bit higher than it was before. And I think as the credit markets generally improve they will probably increase their appetite.

The tier two guys are a lot of the growth in like the recent quarter, but the big things happening is that the credit approvals only tells you part of the story. What's happening is the credit lines are much bigger. So, the total amount of credit that is being granted is actually growing faster than the statistic we use, which is credit approvals. So, I think you will see a bit more tailwind from credit, yes.

That's great. Good. I think that it for me. I have one more quick question, Ken. Remind me, what did you spend on the Mobia ad last year in the first quarter?

First quarter of last year on Mobia product was about $2 million.

Great. Best of luck, guys. Thank you.

(Operator Instructions) One moment, please. We have a question from the line of Joe Munda with Sidoti. Please go ahead.

Good afternoon, guys. I just wanted to see if you can give us a little bit more color on some new product opportunities or new markets that you are looking at? I know the last time we had spoke I think you had mentioned that you're looking at the sub $500 cost to the consumer. Is there any movement on that?

Well, we do have a new direct product in that price range. I don't think we want to preannounce it, but, yes, we are looking at something that will be a little below where our products sell at the moment.

And as far as competitors in this space, with the P90X and Insanity, and a real push towards cardio fitness, what has been the consumer reaction to your product? I know it's a totally different product, but are you seeing more people vying for cardio equipment, or do you think that this P90X/Insanity thing is going to be a fad that is going to die out?

Well, P90X is a different approach. We were thinking of it as being more strength orientated, although it has cardio benefits. So, we are really competing with -- and TreadClimber is treadmills and ellipticals, where those are different markets.

Yes. No, I know that, but I'm saying in this economic climate, I'm just looking at it in dollars in terms of consumers, and you see the popularity of P90X and them showing the results and all this other stuff, and you don't need to buy the equipment. I'm just wondering what is your take on the whole situation? Do you think that --

Well, yes, you raise an interesting point there. If you look at the market segment that TreadClimber addresses, it's really people who are either more female than our traditional customer base, who are older and are looking for general health. The P90X thing, that's a real workout.

Yes.

It's probably not appealing or practical for a lot of the people who would be candidates for TreadClimber. So, it's a good product, it's doing great. I think its really -- if you are interested in P90X, you are probably not a candidate for TreadClimber and vice-versa.

Okay. I mean, also, in terms of product development, do you guys see yourselves doing -- adding a video or more video exercises to the equipment that you offer and more instruction?

We do, and we have actually looked at even offering videos as a separate product category. We haven't made a decision on it yet, but that is clearly a trend and we will be participating.

Okay, great. Thank you, guys.

Our next question is from the line of Steven Martin with Slater. Please go ahead.

Hi, guys, and congratulations on profitability.

Well, thank you.

In terms -- and we talked about this before -- in terms of G&A, selling, marketing, etc., you said to me last quarter that G&A would probably be down a little more. In terms of the run rate, are we at the right run rate or do you have some more room?

Well, there are a couple of factors, I think. First of all, the economy itself is getting a little better, so I think you'll probably see a little bit of range in salary growth at a higher rate than you're used to seeing. Not a lot, but a bit. We've got an opportunity in our IT infrastructure, which doesn't (inaudible) for this year, but probably have a little bit of benefit next year. Get our fixed costs down a bit. And I think the big swing in expenses really comes down to how much do you want to spend on advertising. So, you might see that trend up. It's a variable cost, but you might still see that trend up later in the year.

Well, if I look at the sales and marketing spend at around $15 million, how much of that is the variable component that you're talking about?

Ken, what did we do in the quarter?

So, I think, Steven, we're saying that on the selling marketing that we spent $15 million for the quarter, which is the correct number, $14,865,000. How much of that would be pure advertising versus --

Media and Internet combined.

Yes. Let me -- give me a minute if you have another question, maybe I'll be able to find that, but I don't --

Let's turn to G&A. When I model going out for the second and third quarter, are you implying that there is modest increases to that? Flattish? How should I model that?

I would model it flat. The thing is, by the time you get to, like, the next quarter, if TreadClimber response rates stay where they are, we might want to reduce advertising, because that's very effective. Today we haven't made that decision. So, if we did, we'd talk about it next quarter.

Okay, but that's not in the G&A line; you're talking about the selling and marketing line.

Selling and marketing yes. The G&A is going to be flat, maybe even down over time.

Okay. And while he is looking up that other information, and R&D has been more or less $800,000. Is that --

That's about right. It dips up an down depending on how much we spend on outside projects, so it's probably a fairly decent number.

Okay. So, assuming that we keep getting the sales increase, we should get leverage on both that and the G&A line?

I think that's right. And I would caution, as you know, middle of the year the sales are seasonally lower. So, Q2 and Q3, the leverage isn't going to be apparent. But, yes, I think the objective is to bring more desirable contribution from the sales down because we drop to break-even (inaudible).

Okay. And when are we going to see you guys roaming around New York or visiting us?

Probably pretty soon. We wanted to get the numbers out of the way, and so updating our presentation, we'll probably be a bit more visible again when the numbers are published.

Okay, that's great.

Steve, on the selling and marketing, we're don't break it out in all the details and everything, but what you're looking for is of about $15 million, how much of that is more just advertising dollars versus other marketing on the Web or financing feeds or selling expenses, it's around 50% or 60% of that total.

Which one is 50% to 60%?

The pure advertising.

Okay. So, that is pure advertising. And that is not likely to change as much. And then the other 40% to 50% is that which you will step up if business looks better and the approvals look better.

It's actually the other way around. You would step up the advertising if you're bringing in leads of very good pricing, like we are now.

Oh, okay, got you.

We'll give you some warning on it, but we're not going to do it right away.

Okay, thank you very much.

Okay.

And there are no more questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you very much, everybody, for joining the call, and we look forward to reporting again next quarter. Thanks again. Bye.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.